Accounting is the science of recording the financial transactions that occur in a business. The Core accounting fundamentals don’t differ by industry or business nature.
Think of Math’s Multiplication tables, which don’t differ for each branch.
The primary purpose of accounting is to record the business transaction to
- Reflect a proper financial position as of a particular date
- Ascertain whether it yields profit or loss for a particular period.
All the financial transactions
- Shall not be like Personal expense
- Recorded in Correct GL Accounts
- Shall Pertains to the appropriate period
- is not fictitious
We can talk in simpler terms.
Consider a simple calculation like 2+4.
Can we do it manually?
The answer is an obvious yes.
What if there is a calculation like 24586*6587?
We can do it manually. But we prefer using a calculator.
The increase in complexity requires the use of tools.
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Similarly, consider the daily transactions for a business with a million-dollar turnover. There are more efficient approaches to managing these than the possibility of doing a manual record.
Therefore, an ERP application that automates things like ledger posting, preparation of trial balance, bank reconciliation process, and generating financial reports such as debtor aging and ratio analysis is needed.
The best part of the ERP Application is the step-by-step flow. For instance, it never allows recording a transaction where the debit and credit amounts are unequal.
What’s the Primary Purpose of Accounting is to?
Accounting serves a variety of purposes. Accuracy and transparency in financial reporting is the primary purpose of the accounting. However, there are enormous benefits that are interlinked with the primary purpose. The details of the same are below
Accuracy in Financial Reporting
Accurate Financial reporting ensures timely follow-up of pending receivables and apt payment for the vendors against the supplies, expenses, or services received. Thus, there will not be any liquidity crisis.
Improves Business Reputation
Establishing robust controls and following industry-standard practices in recording transactions builds a business’s reputation. Such businesses stand as a name for trust and confidence. They add assurance to the public, and thereby, it is effortless to procure the public money through offerings or borrowings at economical rates.
Boosts Nation Economy
The government/Ministry of States functions on public money received in the form of taxes (direct or indirect). Successful businesses aid the economy by boosting the nation’s GDP and paying taxes. So, state administrators, being stakeholders in businesses, anticipate accurate accounting practices.
Statutory Requirements
Audits are statutory or regulatory requirements for any business entity. The respective laws of the state or nation in which the entity operates stipulate the requirement for audit. So, there is also a statutory need to maintain transparent and true records of financial transactions at all times. Inaccurate or wrong reporting of financial information might result in penalties or fines.
Tax Compliance
Taxes are levied on sales or services and income earned during the year. Proper record keeping ensures that the taxes are calculated and paid on correct balances. Thus, proper levy and payment of taxes result in an entity being compliant with tax laws.
Supports Decision Making
Accounting supports management decision-making. Businesses run with the motive of making profits. The board of directors or owners wants to understand the net income and profits earned during a particular period. Further, the management also performs business analytics, such as profit by product line or region, the impact of recent marketing expenses on sales, etc. So, everything is dependent on maintaining accurate records
Accounting aids in decision-making for different stakeholders. Below are a couple of the
- Management calculates different accounting ratios, such as the current, debt-equity, and sales turnover ratios, using transactions recorded in the books.
- For instance, the Current ratio shows the business’s liquidity. If such a ratio is less than the requirement, then the entity looks for short-term debts to meet the day-to-day business operational expenses.
- The government/Ministry of States functions on public money received in the form of taxes (direct or indirect). Successful businesses aid the economy by boosting the nation’s GDP and paying taxes. So, state administrators, being stakeholders in businesses, anticipate accurate accounting practices.
Frequently Asked Questions
What is known as accounting?
The systematic and logical method of recording the financial transactions relating to the business is known as accounting.
What are the different types of accounting?
The Fundamentals of Accounting don’t differ between types of accounting. However, they have implications for different branches, such as Financial Accounting and cost Accounting.
Why is accounting used?
Considering the large volume of business transactions, a systematic way of documenting the details of the transaction has evolved. This process is called accounting.
Accounting improves efficiency, flexibility, and ease in recording transactions.
What is debit and credit?
Debit and Credit are two portions of recording a transaction. When combined, these two pieces are called a journal entry.
The debit and Credit concept comes from the fundamental principle that there will be an incoming benefit when there is an equivalent outgoing benefit. For instance, you want to buy a pen worth $10. So, the incoming and outgoing benefits are Pen and cash worth $10 each, respectively. The value of both of these is equal. Due to this fundamental principle, we see that journal entry is always balanced. In other words, the value of the debited account balance equals the GL account credited in a journal entry.
Key Takeaways
The Overall purpose of accounting is to ensure that bookkeeping is accurate and reflects a true picture of the transactions. It aids in decision-making, is tax-compliant, and improves brand value. Accounting starts with identifying the essence of the transaction, the GL accounts involved, and the amounts, as well as recording those transactions as per the accounting rules.